Wise Ways to Give Holiday Money

What are some of the tax benefits of holiday giving?

Giving especially generous monetary gifts over the holidays can be helpful to the giver as well as the receiver, particularly when it comes to taxes. By giving large monetary gifts, the giver may avoid paying taxes on a block of stock or reduce a future high estate tax bill.

Possible Hazards of Gift-Giving

Profitable though it may be, emotionally and financially, to reward your children and grandchildren while you're all together to enjoy the process, there are often inherent dangers in the giving of large gifts. In many cases, the receipt of a large amount of money can be a corruptive force. If an immature person suddenly has a small fortune in his or her hands, it may result in a foolish, frivolous, or even hazardous expenditure. Young people, unprepared to invest wisely, may buy a very expensive piece of unnecessary equipment, or may even use the money to buy drugs.

Protecting Recipients from Themselves

Because of the hazards mentioned, many givers want to maintain some control over how their money will be used. There are several ways to protect both the recipient and the money.

These include:

  • Setting up a custodial account for a child under the age of 18 or 21 (depending on the state) under the Uniform Gift to Minors Act or Uniform Transfer to Minors Act
  • Establishing one of various types of irrevocable trust
  • Setting up a trust for a married child in that child's name alone, to protect assets in case of a divorce
  • Establishing a 529 Plan to help with a college education --a 529 Plan is free of federal, and sometimes state, tax when used for approved college expenses
  • Making five annual tax-free gifts of $14,000 gifts to an individualĀ 
  • Making tax-free payments (even over $14,000 per year) directly to a college or medical provider
  • Making a large down payment for the home of another (but in this case the $14,000 rule still applies)

Things to Remember

In giving sizable gifts, it is important to be aware that:

  • It's a good idea to give the gift as much as a year before any purchase is made
  • You should file proper gift-tax returns, reporting the sum to the IRS as a gift
  • If you give stock, the recipient will have to pay tax on all gains over original priceĀ 
  • The tax obligation should be taken on by the person in the lower tax-bracket, whether giver or recipient
  • If the gift involves a money-losing investment, it's best to sell it first and claim the tax loss yourself

In all matters of inheritance and tax, especially when you're dealing with a large estate, it is essential to engage the services of a knowledgeable, experienced estate planning attorney.

Posted in Trusts

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